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Non-financial crisis … for now

Facade of the Bank of Spain in Madrid.

It did not seem easy to avoid financial ramifications of the health crisis. The sharp drop in GDP in 2020 and the slower reactivation of productive activity in 2021 – with the additional damage of inflation – did not bode well. However, the financial system has responded well by maintaining the chain of payments and granting – with public guarantees from the ICO – liquidity and credit to companies and the self-employed. Unlike the previous crisis, of a financial nature, credit institutions have been part of the solution and not part of the problem. Of course, the extraordinary liquidity granted by central banks, the relaxation of some accounting standards, and government measures – loan guarantees and defaults – have prevented a cascade of business insolvencies that would have amplified, and in what way, the consequences on the real economy.

This Wednesday the delinquency data for October 2021 were published, placing it at 4.36 %, almost unchanged with respect to previous months. However, according to a recent analysis by the European Banking Authority, 7.7% of the stock of credit default of Spanish banks are already in arrears, similar to 6.4% of loans with overdue arrears. That of the loans guaranteed by the ICO is still at 2%, although it is on the rise. NPLs are likely to increase significantly in 2022 as stimulus to the economy is withdrawn. How much will depend on whether loans made during the pandemic can be paid back or a problem that will soon have to be addressed is simply being postponed. The time saved – unlike the crisis of 2008 – may have brought more benefits than disadvantages. Among other things, because the pandemic is lasting longer than expected.

It will be essential to determine whether the guaranteed financing and the insolvency and bankruptcy moratoriums Credit contributes to maintaining companies zombie , those that do not have viability, regardless of the pandemic. They do not contribute to recovery and will pose a serious problem. The reform of the Bankruptcy Law, approved in the Council of Ministers this week, aims to give companies some air before leading them to bankruptcy. Accumulated losses in pandemic years will not be taken into account. There is a risk of “procrastination” if companies take the opportunity to delay an inevitable end. However, the reform will ensure that these behaviors do not occur and, if the bankruptcy solution is finally reached, it will be more agile and efficient.

Something similar happens with the credit default. It is hoped that the extension of deadlines and other benefits of the code of good practice will allow many more companies to get ahead compared to those that only aspire to delay its completion. These precautions in Spain and other countries do not obviate the problems of business vulnerability that have arisen since the financial crisis. They are more serious for those companies that do not offer higher productivity in the digital and sustainable “new economy”. It seems that the current crisis will not be financial and the impact on public accounts (due to possible losses in ICO guarantees) will be limited, but we will have to wait more time to affirm it completely.

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